Equities Are Hot, but Bonds Still Sizzling: Morningstar

January asset flows to U.S. stock funds break a two-year downturn, as analysts wonder if the trend will hold.

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Morningstar says that investors added $86.5 billion to long-term open-end mutual funds in January, with 72 of 93 open-end categories recording inflows. When these flows are combined with $28.6 billion of inflows for exchange-traded funds, it was “by far the largest one-month inflow on record,” the Chicago-based research firm says. All asset classes and each of the top 10 open-end fund providers saw long-term fund inflows.

“Market observers have been waiting for a sign that the multiyear trend of investors buying fixed income while selling U.S. stocks would reverse in a so-called ‘great rotation,’” said Mike Rawson, fund analyst on Morningstar’s passive-funds research team,” in a statement.

“Inflows of $15.5 billion for U.S. stock funds, the largest monthly intake since 2004, and the first month of inflows in the last 23 for active U.S. stock funds, support this development,” Rawson said.

Still, he notes, U.S. stock funds did experience “slower organic growth” than any other major asset class in January. In addition, seasonal and onetime factors, such as lump-sum contributions to retirement accounts and acceleration of dividend payments, seem to indicate “that claims of a paradigm shift in investor behavior may be premature.”

The four-plus-year trend of investors’ allegiance to fixed income, for instance, appears to be holding steady: The intermediate-term bond category had the greatest inflows in January with $10.5 billion, according to Morningstar.

Furthermore, taxable-bond funds led all asset classes. They had inflows of $31.0 billion in January, followed by international-stock funds, which took in $18.4 billion.

In terms of the major fund families, Vanguard had inflows of $17.6 billion, nearly 90% of which flowed to the firm’s passive lineup, notes Morningstar. Plus, Vanguard funds “swept the top-three spots for fund-level inflows, led by Vanguard Total Bond Market’s inflows of $4.3 billion.” In addition, American Funds saw its first monthly inflow since June 2009.

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